Apple Inc. Rumored to Cut iPhone Prices in Early 2018 | The Motley Fool

The impact of price cuts
The reason companies cut prices is simple — they want to boost demand. However, it’s important for investors to understand that iPhone revenue is a function of two factors: iPhone unit shipments and iPhone average selling prices.

If Apple is thinking about cutting iPhone pricing, then the company probably thinks it can grow iPhone unit shipments by enough to more than exceed to loss of revenue, as well as per-unit gross profit margin, from the price reduction.

This seems like a reasonable strategy: Apple introduced its new iPhones earlier this year and captured the significant early demand that there often is for the company’s new devices.

However, as the competitive environment intensifies from competitor product launches and customers recognize that Apple’s next generation of iPhones continues to creep closer, demand for Apple’s latest phones — especially at full price — is naturally set to wane.

By cutting prices, Apple may hope to stimulate demand for its devices and, in doing so, maximize the amount of revenue and profit it generates from these devices over the product cycle.

Now, figuring out by just how much to cut prices, if Apple decides to do it at all, is not trivial. If Apple cuts prices by some percentage, it has to have a reasonable degree of confidence that total unit shipments will grow by greater than that percentage.

Too small of a price cut, and Apple risks simply seeing a minimal increase in demand while it loses a significant amount of revenue and, importantly, profit. Too large a price cut, and Apple might see significant unit shipment and possibly even revenue growth, but it could so dramatically eat into its profit margin that it’d have been better for Apple to not cut prices at all.

The point is that a lot of thought is going to need to go into any potential price reductions.

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Apple Inc. Rumored to Cut iPhone Prices in Early 2018.